Time Bomb: New Overtime Regulations Mean Higher Labor Costs for Restaurant Operators
When President Barack Obama announced a sweeping change to the country’s overtime pay law on June 30, the ripples from the first proposed adjustment in decades were immediately felt throughout the retail industry.
To some employees, it could spell the end of working extra hours without additional compensation. For many employers, they will be forced to change their labor scheduling to comply with the changing regulations or give their managers a hefty pay raise.
The new rule governing overtime pay will mean bigger paychecks for up to five million workers as early as 2016, according to the U.S. Department of Labor. Currently, employees covered by the Fair Labor Standards Act must receive overtime pay for every hour they work over 40 in a week unless they are designated as managers with a salaried position and earn more than $23,660 per year ($455 per week). The proposed rule will raise that threshold to $50,440 ($970 per week) next year. In order to avoid paying overtime, employers must raise salaried positions to that level or pay the employee overtime for hours in excess of 40 each week.
The overtime exemption was originally meant for highly compensated executive, administrative, and professional employees who may also receive additional perks as part of their pay package. But for many retail and restaurant managers, their duties often include workweeks of 50–60 hours per week or more with no additional compensation. Those workers earning even slightly over the $23,660 threshold today are entitled to only their base salary and no additional pay for any extra hours they work.
The salary threshold has only been updated once since the 1970s, and inflation has rendered that figure too low, according to the Obama Administration, which has the power to issue the new regulation without congressional approval.
For restaurant operators, this latest development comes on the heels of a plethora of new laws and ordinances gradually raising the minimum wage in a number of cities and states. For many, it’s a one-two punch that has some business owners reeling. Add concerns over implementing the Affordable Care Act, the recent National Labor Relations Board ruling that could hold parent companies and franchisees equally liable as joint employers for labor law violations, and rising commodity costs, and it’s easy to understand how some foodservice operators feel pummeled by regulations.
“Instead of a just one-two punch, it’s more like a beating,” says Angelo Amador, senior vice president of labor and workforce policy and regulatory counsel at the National Restaurant Association. “The ground is shifting underneath restaurant owners and they are getting it on all fronts.”
Amador says business owners need the flexibility to offer hourly employees the chance to move up to a management position without having to track their hours. In exchange for the extra hours worked, a salaried position can offer additional benefits—such as health care, vacation, and sick leave—and other perks not available to hourly workers, he says.
“If these employees are paid by the hour, these benefits might no longer be available to them,” Amador says. “Some employees may feel they are being demoted.”
However, public sentiment seems to favor raising restaurant workers’ pay. In a 2014 survey of 1,000 restaurant-goers, Technomic found that 83 percent support increasing the minimum wage and adjusting it annually for inflation. The research firm’s study found widespread backing across age groups and political orientations.
When the overtime changes kick in, many quick-service and fast-casual restaurant operators will need to change their employment strategy, says Bob Goldin, executive vice president at Technomic. “This is an industry that has benefited from a steady supply of low-cost labor,” Goldin says. “Now, with an improved economy and recent social movements against low wages, that model is going to have to change.”
The extra money to pay workers will have to come from increased efficiency, more strategic labor scheduling, and possibly higher menu prices.
“There’s no magic pot of money to subsidize the pay increase,” says Steven Kramer, president and CEO of Workjam, an employee relationship management platform for the service industry. “With the other pressures and new regulations restaurant operators are facing, this could be a perfect storm that will force organizations to become more efficient.”
Kramer says operators will need to get creative to solve these issues. There are no easy answers. “There is a lot of fear and uncertainty right now,” he says.
Ultimately, if increased labor costs translate to higher menu prices, it remains to be seen if consumers are willing to put their money where their mouths are.